Impact of China and India on SSA Infrastructure Development: Issues and Challenges

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1 Impact of China and India on SSA Infrastructure Development: Issues and Challenges By Martyn Davies and Sanusha Naidu Centre for Chinese Studies University of Stellenbosch And Inyambo Mwanawina Institute of Economic and Social Research University of Zambia A position paper prepared for the sub-saharan Africa Asian Drivers Workshop African Economic Research Consortium Addis Ababa, Ethiopia 9 th 10 th October 2006

2 Page 2 1. Introduction The position paper serves as a framework for outlining the engagement in the Construction and Infrastructure section of the sub-saharan Asian Drivers Project. Infrastructure development is an important component in the industrialisation drive of any country, Not only does it satisfy the physical needs of a country but it also enhances the socio-economic livelihood of communities by connecting them to the local market and regional spaces. The provision of roads, rail, airports, terminal buildings, harbours, communications, pipelines, hydroelectric plants, storage facilities, plant and buildings can be classified as the provision of physical infrastructure depending on its purpose. The provision of infrastructure aims to reduce capacity constraints in order to achieve operational goals and technological transfers aimed at developing the country s capacity in the longer term. Infrastructure is important in facilitating trade within the country as well as with regional and international markets. Moreover, it is also important for stimulating other secondary economic activities. Infrastructure development leads to the establishment of physical stock of capital whose creation has a direct impact on the socio-economic development of the country in the short-term and a more nuanced indirect effect in the long-term. The long-term direct effect is judged in terms of maintenance of the infrastructure while the indirect effect relates to how trade facilitation is enhanced, including the stimulation of other activities. In Africa, infrastructure development is considered to be one of the core weaknesses constraining the continent s sustainable development prospects. While it is clear that the development of infrastructure is important in improving the country s capacity in order to achieve sustained socio-economic development, reduction of poverty and the achievement of industrilization, the evidence in Africa points to the contrary. In fact it would seem that Africa s poor infrastructure could be one of the contributory factors that is undermining the Continent from achieving the Millennium Development Goals. Undoubtedly, then for Africa to improve its infrastructure deficiencies there must be an improvement towards and an increase in the investment of infrastructure projects. This is the perspective of the NEPAD programme whose primary aim is to strengthen Africa s weak infrastructure in order to strengthen regional integration, expand market capacity (including access and the livelihoods of communities) and enhance the transfer of relevant technological skills. The emergence of the Asian Drivers, notably China and India in this regard, has become particularly relevant for providing the impetus towards strengthening Africa s infrastructure requirements. With China and India becoming important global economic actors, they have, indeed, also become alternative sources of foreign direct investment, especially for

3 Page 3 developing and/or least developed countries. In Africa, the economic attractiveness of China and India can be especially felt in Sub-Saharan Africa (SSA). The rapid growth of China and India means that these two Asian giants are in desperate need of natural resources. This is especially, important, for those Sub-Saharan African countries that can meet such requirements and the implications this has for their economic development. One such impact is in the area of infrastructure development. There are countless media reports outlining how China and to a lesser extent, India have aligned their strategic natural resource interests in SSA with investments in infrastructural development. Wh ile not empirically proven it is hypothesised that the alignment between investments in the extractive industries and infrastructure development especially by China has brought about much needed rehabilitation of SSA s infrastructure and hence prospects for economic development and regional integration. On the other hand, critics are less convinced that China s investments in SSA s infrastructure will reorient the economies of the region given 1) their diversity in terms of economies of scale, 2) the differential impact that China and India have on producers and consumers, and 3) issues of quality, efficiency and competitiveness. Therefore, the purpose of this position paper is to develop a critical understanding of how the Asian Drivers integrate themselves into SSA s infrastructure market and the direct or indirect impact(s) this has for economic development, poverty reduction, and governance issues at the local level. Moreover the paper will explore how the competitiveness of the Asian Drivers informs the behaviour of other traditional investors (including those economic actors from region e.g. South Africa) in SSA s infrastructure sector. This will be done by developing a broad framework which outlines the following: The motivations, structure and implementation of the Asian Drivers corporate strategy and operations in the infrastructure sector of the SSA market; The backward linkages to their rapid growth trajectory; The political linkages developed with state elites; The upstream and downstream effects of the Asian Drivers infrastructural investment on local markets and within the regional context; The form of technology transfer that is being experienced; The comparative perspective of investment practices between the Asian Drivers and non Asian Drivers in the infrastructural sector; and The relationship between the Asian Drivers infrastructural investments and the commodities sector in SSA. As a corollary to the above outline, the paper will also give consideration to more important cross cutting issues like:

4 Page 4 The implications for governance and transparency; Repercussions for the environment; and The impact on growth distribution patterns in SSA The paper is structured as follows: Section 2 provides a profile of the construction industry in China and a lesser extent India. Section 3 focuses on the outline of the Asian Drivers engagement in Sub-Saharan Africa. Section 5 assesses the issues and challenges that the Asian Drivers represent in SSA s infrastructure sector and provides a scope for the intended study. Se ction 6 deals with the more substantive issues in defining the importance of the research agenda within the context of the infrastructure sector for the broader Asian Drivers project. Section 7 concludes with a description of the appropriate methodology and suggested case studies to be considered in the broader project. 2. Profile of the Asian Drivers construction industry 2.1. China s construction industry: Backward linkages to the domestic economy In order to understand China s involvement in Sub-Saharan Africa s infrastructure sector, it is important to briefly examine the context of China s domestic construction industry, its development, and strategic importance in terms of the country s foreign policy. The construction industry has been one of the economic backbones of China s development priorities. Under Mao and even during the adoption of the Socialist Modernization project by Deng Xiaoping after 1979, prioritising infrastructure projects such as hydro -electricity, water control bridges, roads and heavy industries was emphasized and considered a necessary condition to improve China s development deficiencies. Until relatively recently, the majority of construction companies in China were state-owned. The privatization of many state -owned enterprises (SOEs) and the rise of private companies have diversified the market. Rapid economic expansion has provided continuous momentum for construction in China, which currently has the largest construction market in the world. However, with such rapid growth, demand continues to be a challenge especially in terms of the capacity of the construction companies and the availability of materials. Since 1999, the construction industry in China has achieved annual growth rates of 20 percent. In 2003, there were 48,688 construction enterprises in China, employing million people. According to the PRC Ministry of Construction, while the construction industry accounts for only 7 percent of Chinese GDP, the sector s corollary industries drove 50 percent of the

5 Page 5 country s economic activities in By the end of 2004, China's accomplished business volume through contracted overseas engineering projects totalled US$ billion, and the total volume of contracts stood at US$ billion. But structural weaknesses have handicapped the industry and forced the PRC government to introduce reforms and a restructuring of the sector. These included: overstaffing, poor management, insufficient capital and out-dated technology. Moreover Chinese construction companies did not traditionally have their own research and development (R&D) departments. These were administered by the line ministries or provincial and municipal governments, which consequently received very little attention in China until recently, representing 0.6 percent of the country s GDP in By 2005, the R&D portion of China s GDP had increased to 1.5 percent, ranking China as one of the top R&D investors in the world. The emphasis on R&D is as a result of Chinese construction firms entering the global market. The Going Global strategy adopted under Deng Xiaoping s economic reform prorgramme was part of the initiative to make Chinese firms competitive. In August 1979, China s State Council introduced an act permitting specialized Chinese companies to operate overseas. Prior to this, Chinese companies operating overseas were restricted to projects that provided economic and technical aid with funds provided by the Chinese government. This exposure enabled Chinese companies to gain international market experience that was to their benefit following the Chinese government s adoption of an opendoor policy. This provided the platform for Chinese firms to become more engaged in overseas markets. According to the United Nations Conference on Trade and Development, (UNCTAD), by the end of 2003, there were 7,400 Chinese enterprises investing in 160 countries internationally. Collectively these enterprises held US$33.2 billion in contracts. A spectacular increase from the 143 Chinese enterprises worth US$170 million in 45 countries recorded in Yet it was the intervening 20 years that has seen a decided change in China s foreign investment strategy. This began between 1985 and 1990 when the Ministry of Foreign Economic Relations and Trade moved to become a legal entity, with sufficient capital to officially encourage overseas expansion. By 1990 there were 620 Chinese enterprises worth US$860 million in 90 countries. The government encouraged technological upgrades and propagated what was known as its two resources, two markets approach in the 1990s, thereby encouraging the utilization of both the domestic and the international markets to strengthen the firms commercial position. At the 15th Party Congress in 1998, a further

6 Page 6 development ensued with the adoption of the grasping the large, releasing the small policy that allowed all but the largest state-owned enterprises or those concerning national security interests to be privatised. By going global these enterprises enabled China to have access to advanced technology, raw materials, foreign exchange and expanded export markets. All of these are essential for maintaining China s economic momentum and seen as crucial to the Chinese Communist Party s national interest. China s centrally planned going global strategy targeted 28 special economic sectors. The strategy also included increasing access to international markets, competitiveness through global competition, and expanding Chinese exports. If a Chinese multinational, state-owned or otherwise, is earmarked as a flagship enterprise, it can also expect additional preferential treatment from the Chinese government, in particular, the State Assets Supervisory Administration Commission (SASAC), which has compiled a list of 166 such companies. Several, including the China Overseas Engineering Corporation (COVEC), China Roads and Bridges Corporation (CRBC) and China Railway Construction (CRC) which are active in construction projects in Angola, Sierra Leone, Tanzania, Zambia as well as in other Sub-Saharan African economies. Often bids that would be deemed too costly by global competition standards, but considered strategically important by the Chinese Government, are pursued by Chinese multinationals which then receive additional public sector backing. The motivations for Chinese companies to expand into overseas market are expansive and include the following: Resource Security to meet China s energy and other raw material needs. Technology efficiency to improve innovation and R&D Market access in a variety of sectors including textiles, footwear and electronics due to over industrialization and saturation in the domestic market Diversification of portfolios, and Acquiring strategic assets Chinese construction companies discovered that most of these goals can be attained by expanding into new African markets.

7 Page India India s infrastructure sector, like China, has undergone a restructuring following the Government s economic reforms in the 1990s. Following a shift from a controlled to an open market economy, Indian firms have restructured and improved their market competitiveness. Part of the motivation for the refo cused strategy is linked to the rapid growth of India s domestic economy. Whereas previously the infrastructure was dominated by public sector firms, the Indian government has increasingly introduced policies that are private sector friendly in order to attract much needed FDI to rehabilitate the country s weak infrastructure. Last year (2005) the Indian government decided to liberalise regulations governing the construction and real estate markets. Construction activity in India is worth US$50 billion per annum, contributes 6% to the country s GDP and employs approximately 40 million people mainly from the informal sector. But it is the outward expansion of India s MNCs that has warranted much attention. India s international diplomacy has rapidly shifted to cater for a globalising world economy. Unlike China, India s outward shift is being driven by private rather than public capital. The emergence of India s MNCs is primarily focused on emerging markets. This is because Indian firms, often lack the capital, products and technology to compete with their counterparts from the West. As a result Indian firms, like their Chinese competitors, are venturing into less competitive market spaces in the developing world and Africa increasingly. The strategy is endorsed by the Indian government who is encouraging their firms to focus on non-traditional markets, especially emerging market economies in Africa. While, the majority of India s MNCs seem to concentrate on the knowledge sectors, which include IT, healthcare, pharmaceuticals, biotechnology, and the automotive sector, more traditional sectors like energy are also shaping this expansion. A number of factors in the Indian domestic economy are facilitating this trend: strong growth, sizeable domestic consumer market, skilled labour, high levels of education, India s wealthy international Diaspora, and improvements in the manufacturing processes of companies. The outbound strategies of Indian firms include the following: Backward Integration: Indian firms in basic industries are acquiring upstream companies to secure natural commodities and resources. Energy Security: On the back of rising energy demands and escalating oil prices, India s energy firms are on the acquisition trail. Having to import almost 70% of its oil requirements, India feels vulnerable due to its lack of domestic deposits

8 Page 8 Satellite investments: India s pharmaceuticals and IT industries have established a wide presence in the global economy. It would seem like China, the expansion of Indian firms into the global economy is influenced by its growing domestic economy and the attendant needs it requires. 3. Asian Drivers Engagement in Sub-Saharan Africa 3.1. China s Engagement in Sub-Saharan Africa China s interests in Africa are guided primarily by economic imperatives. China s Africa Policy Paper, released in January 2006, as well as underlining increased engagement with the African continent, reinforces China s declared policy of respect for national sovereignty and non-interference in the internal affairs of other states. This attitude has been favourably received by African heads of state that have, in some cases, prioritised political and commercial links with China as a result. Construction companies, both state -owned enterprises (SOEs) and the growing number of private companies, through their activities in Africa, earn hard currency and develop a convenient platform from which to penetrate new markets and secure access to natural resources through investment, trade and military assistance. Chinese companies engagement in Africa s construction and infrastructure sector is thus not dissimilar to the activities of Western multinationals. It is just the unprecedented scale of Chinese operations, combined with the condition of the African state, which has given the international community cause for concern. The Chinese companies naturally prefe r to position themselves in booming economies in Angola, or in countries where there is also a long history of relations with China such as Tanzania. The Chinese Government has a longer time-frame in terms of strategic considerations, focusing on areas where they perceive medium- to long-term value in terms of relations with Angola, Zambia, and Sudan. Chinese engagement in the construction and infrastructure sectors of sub-saharan Africa is broadly linked to China s strategic energy interests. Many of the construction projects contracted by Chinese firms are funded through Chinese Government loans or financial aid to developing African countries. An example of such an arrangement is the Chinese oilbacked loan to Angola, recently reaching US$ 9 billion. This loan money, from China Exim Bank, is intended for the rebuilding and reconstruction of national infrastructure destroyed

9 Page 9 during the Angolan civil war. The loan is, however, conditional on 70% of all construction contracts being awarded to Chinese construction firms pre-approved by the Chinese government. Chinese SOE engagement is thus characterised by the price competitiveness of their operations through low cost engineering inputs, lesser supply chain costs and relatively cheap labour; cheap capital provided by China s policy and commercial banks; and active PRC government support in order to foster strong political ties with resource -rich African states. During the 1960s and 1970s Chinese aid focused on infrastructure and development, such as the turn-key project Tanzam railway between Tanzania and Zambia. Chinese SOEs have since recently embarked on a number of large-scale infrastructure projects in sub-saharan Africa: On the back of the China Exim Bank loan to Angola mentioned above, China is the largest player in this country s national reconstruction. Projects include the US$ 300 million rehabilitation of the Benguela Railway line, linking the Zambian Copper mines to the ports in Luanda and Lobito, undertaken by the China International Fund Ltd, a Hong-Kong-based construction firm. The other main railways, the Moçamedes and Luanda Lines are also being rehabilitated, as well as other important sections of national roads. Chinese firms are also engaged in the construction of several government buildings and housing projects. Chinese companies are in addition involved in several water infrastructure projects in Africa. In Ethiopia Chinese SOE China National Water Resources and Hydropower Engineering Corporation (CWHEC) will build the main concrete dam for the Tekeze Hydro -Power Project (THPP), a US$ 224 million dollar project. In Tanzania, China Civil Engineering Construction Company (CCECC) is engaged in a US$77.2 million water project aimed at increasing water supplies to towns and villages in the Shinyanga region, in northern Tanzania. The Chinese government also provided US$11.73 million for the Chalinze water supply project in Bagamoyo District, Tanzania. Chinese companies won tenders for the rehabilitation the urban water supply of the Maputo, Beira and Quelimane districts of Mozambique, projects totalling US$ 45 million. A poignant feature of China s renewed push into SSA s construction and by implication infrastructure sector is the growing role played by The Export-Import Bank of China (EXIM Bank) in not only to boost trade and investment but also enhance China s influence abroad. The China EXIM Bank was established in 1994 and is wholly owned by the Chinese government and its management is appointed by and reports to the State council. The main

10 Page 10 function of the Bank is to promote exports and investments. It does this through its core activities. These are: export credit, international guarantees, loans for overseas construction and investment, and official lines of credit. The Bank s portfolio has grown substantially with annual disbursements more than tripling in five years to US$15 billion. In the past two years the Bank has provided credit for the following projects linked to infrastructural development: A possible US$1.2 billion in new loans to Ghana, including US$600 million for construction of the Bui dam A US$ 2.3 billion in total financing for Mozambique for the Mepanda Nkua dam and hydroelectric plant and another US$300 million for the Moamba-Major dam. A $1.6 billion loan for a Chinese oil project in Nigeria. $200 million in preferential buyers credit for Nigeria s first communications satellite. A $2 billion line of credit to Angola as mentioned above. It would seem that the Bank is targeting sectors where Western private or official capitalism is often limited. The attractiveness of the infrastructure sector for Chinese investors could also be as a result of traditional donors neglecting the sector in favour of channelling money into education and health sectors India s Engagement in Sub-Saharan Africa India s large and growing domestic economy provides a strong resource base from which to expand offshore. Low labour costs, sizeable domestic consumer market, skilled labour, high levels of education and India s wealthy international diaspora all contribute to India s competitive advantage. Leveraging traditional relations built up during the colonial period, India is ideally positioned to take advantage of its durable political ties for commercial positioning on the continent. India s emerging multinational companies (EMNCs 1 ) are being welcomed into African economies and, like China, do not have to contend with the political baggage of being a former colonial power. This is a card that is being used by the Indian Government, projecting itself as a country from the South and a partner for development in Africa. This is being done both at the bilateral and multilateral levels. India regards Africa s economies as emerging markets for its exports and investment destinations for its corporates. Delhi is facilitating this engagement through preferential 1 The definition of Indian EMNCs includes those of the Indian diaspora in foreign markets - Mittal Steel for instance.

11 Page 11 financing that is assisting Indian companies to gain footholds on the continent. Initially conceived as a trade lobbying group vis-à-vis the WTO, the India-Brazil-South Africa (IBSA) initiative is evolving into an established platform upon which broader and deeper commercial co-operation can take place. IBSA will undoubtedly play an increasing role in India s commercial engagement of the continent and a vehicle for further trade and investment initiatives. Indian firms are taking advantage of favourable domestic economic conditions to move into the global economy. Low labour costs, strong economic growth and the availability of highly skilled labour will all assist Indian firms in their drive for multinational status. They are also gaining invaluable experience in African markets. Their existing (ethnic) networks in East and Southern Africa are facilitating their market entries. India s aspirant multinationals are, however, competing more and more with Chinese firms on the continent. They are entering the same sectors, mostly in the automotive, construction and extractive industries. Indian firms competitive advantage is based upon a number of foundations - long term political ties coupled with domestic economic determinants that are very similar to China s - booming domestic economies and an emerging confidence to extend their commercial reach into the international economy. Africa s largely virgin markets are providing attractive homes for Indian capital and business expansion. Along with China, India s commercial engagement of the continent will have long term strategic consequences for the continent - an economic destiny that is no longer framed by European interests but from the emerging global powers of India and China. India s EMNCs are increasingly active in the energy, utilities and infrastructure sectors in Africa. Moving away from its traditional commercial sphere of influence, East Africa, Indian companies are extending their reach across the continent. In the realm of infrastructure development, most activity relates to the construction of railway lines and power projects. The winning of the concessions for the Senna and Beira rail network in Mozambique by an Indian consortium including Rites and Ircon International was a recent high profile project. Rites is also laying the Mo çamedes line in Angola, utilising a US$40 million credit line provided by the Indian Government. Ircon International has also been sub-contracted for the Khartoum-Sennar rail line in southern Sudan. India s penetration of Africa is also tied to privatization programmes. In November 2005, Global Infrastructure of India acquired the rights to operate the southeast railway system in Nigeria. Interest in the privatization of the Congo-Ocean Rail Company in Congo Brazzaville has also been expressed. Rites also prequalified in June 2005 for the Tanzania railways concession after being unsuccessful in its

12 Page 12 bid for the Kenya-Uganda rail concession. Attempted market entries have been in Mauritania and Madagascar. In the power generation sector, Tata has been present in Uganda since 2001 and since August 2004, Fourress Engineering has been managing a power supply programme in the country. BHEL is set to build a 500w thermal power plant in Kosti, Sudan in a project worth US$457 million the largest in the country. The Indian government has extended a US$350 million concession line towards the project 2. Bharat Electrical is currently involved in rehabilitation work at Zambia s Kafue Gorge. An Indian concern has also invested in a cement factory in Zambia. The Export and Import Bank of India has also recently extended a US$65 million loan to Ethiopia to finance an energy transmission and distribution project undertaken by an Indian company. The credit facility comes as a directive of the Indian Government 3. Heavily involved in Africa,Tata s revenue of US$210 million comes from its operations in Ghana, Malawi, Mozambique, Senegal, South Africa, Tanzania, Uganda, Zambia and Zimbabwe. Sugar Mill equipment and machinery at the sugar estate on the banks of Kafue river (app. 3,500 hectares) in Zambia was supplied by the Indian Sugar and General Engineering Corporation. The capacity of the sugar milling plant is 1,500 tons of cane per day and was funded by a loan from Export Import Bank of India (EXIM) line of credit given to PTA Bank in the amount of US$ 7.50 million. Indian firms are also investing in African economies in the telecoms sector. Nigeria, Malawi and Mauritius are all recipients of Indian telecoms investment. 4. Trends and Patterns 4.1. China s Investment in Africa s Construction Sector From the Construction Sector study conducted by the Centre for Chinese Studies the following trends emerged with respect to Chinese investments in the four country case study, namely Angola, Sierra Leone, Tanzania and Zambia. Market Entry Strategies Prior to 1979, state-owned construction enterprises were among the few Chinese institutions permitted to leave the Mainland and engage the outside world. The experience of these companies in the construction of large-scale infrastructural projects, often in extremely isolated areas, has proved invaluable in the current context. With access to substantial 2 BHEL to set up 500w thermal project in Sudan in The Tribune, 13 February Exim Bank extends loan to Ethiopia, in The Economic Times, 21 April 2006.

13 Page 13 liquidity, it is no surprise that Chinese SOEs are at the forefront of China s engagement with Africa. The Chinese government regularly commissions SOEs for infrastructural aid projects in countries where it wishes to expand its sphere of influence. The government sele cts construction companies for these projects through a competitive tendering process conducted and opened to all Chinese companies. The size and capacity of private companies is growing rapidly, but SOEs still dominate China s construction market and continue to win the majority of these international contracts. Winning the bid for a government-endorsed contract enables the Chinese company to secure low-lost capital from China s central banks to deal with the expensive start-up costs associated with moving the necessary equipment into place. Before leaving China, these companies regularly engage a host of private Chinese sub-contactors specializing in different areas of construction such as plumbing, electrical engineering and airconditioning which they take with them. While seeking large-scale government projects the companies will also engage in small scale private projects and make full use of their access to relatively cheap capital from Chinese banks when necessary. It is at this juncture that the Chinese companies first encounter competition with local companies. The sub-contractors and individual employees also seek opportunities toward establishing their own businesses in host economies. This is often done through personal networks where the assistance from friends or family members brought out from China serve as a platform to set up small enterprises either in the service sector or manufacturing with small scale assembly plants. This is a phenomenon similar to that observed amongst Indian labour brought out by the British to East Africa as well as in other parts of the British Empire during the colonial period. In so far as the emergence of small-scale Chinese traders have enabled African consumers to gain access to new products and services that were previously either unaffordable or inaccessible, these Chinese enterprises have also served to deepen China s penetration of the African economy, especially its presence amongst the informal sector through the establishment of new markets. China s Edge The representatives of Chinese construction companies who were interviewed suggested that the competitiveness of Chinese firms resulted from their:

14 Page 14 Low Labour Costs; Hands-on management style; High degree of organization; and General aptitude for work Surprisingly none of the representatives interviewed alluded to their access to relatively cheap capital, which is perhaps the single biggest challenge that their competitors face, as part of the Chinese comparative advantage. While the SOEs can secure the necessary funds for advance payment and performance bonds from their head offices in China, they and other smaller private companies can also secure loans at flexible rates from Chinese banks such as the Bank of China, the China Development Bank and the China Exim Bank. Chinese worksites are usually highly organized and all the personnel, from the executive down, invariably live and work on the site full time. This hands on style of management saves considerable time and provides management with a profound understanding of the project and the ability to handle challenges as they occur. While local and foreign construction companies operate on profit margins of percent, Chinese companies usually operate on margins of under 10 percent, thereby making them extremely competitive. An executive representative of a large SOE interviewed in Tanzania and speaking on condition of anonymity disclosed that his company and many other SOEs operate on profit margins as low as five percent. Chinese companies may occasionally undercut competitors by up to 50 percent on the price of the overall bid. But such low prices are an exception rather than a rule as was observed with the bid by the Chinese company based in Guinea for a road construction project in Sierra Leone that was twice the winning bid from an Italian company. Each of the countries examined in the study had Chinese Trade Centres that provided information to both local and Chinese businesses wishing to enter the respective market either through trade or investment options. These Centres also provided limited logistical support assisting with the organization of accommodation, transportation and in some instances telecommunications. Such services are usually offered for a fee. The Chinese government is obviously very supportive of Chinese construction companies, although all the Chinese diplomatic representatives interviewed were adamant that this support is in line with free trade practices and limited to what several described as political support. In practical terms the latter means assisting Chinese nationals with administrative

15 Page 15 problems that they may encounter with local authorities. More crudely put this amounts to identifying and accessing appropriate local government officials, which can be a costly and time consuming affair, especially when seeking payment. In some instances it represents a significant advantage. Competition with Traditional Players In countries specifically targeted by the Chinese government such as Angola, Zambia or Tanzania, the initial arrival of the Chinese construction companies has had an enormous impact on the local industry. The other foreign companies, mainly from Europe and South Africa, which had traditionally dominated the construction sector with their large-scale projects, were the first to experience competition with the Chinese. A case in point is that of Zambia and Tanzania where Chinese construction companies, over a period of five to ten years, rapidly gained approximately 30 and 40 percent of the respective markets. Though the Chinese presence continues to grow incrementally, these markets have since adjusted to the Chinese and have now begun to stabilise. The Chinese have only just entered Angola and are expanding rapidly causing considerable alarm as many of the traditional players find themselves unable to compete. Given the PRC s obvious interest in Angola, complemented by a corresponding scale of investment, we can expect it will be sometime before the situation stabilises. This is in marked contrast to Sierra Leone where the construction market remains small and the impact of the Chinese construction companies is minimal, despite the country finding itself swamped by Chinese consumer products. Very few local companies in the countries surveyed have the capacity for large-scale projects and rarely find themselves competing with Chinese companies in the early stages of the latter s market penetration. We observed a number of cases where Chinese companies regularly subcontract local companies albeit with strong reservations. Many of the Chinese company representatives consulted expressed dissatisfaction over the quality of the work done by these local contractors and cited concerns over their ability to manage finances and keep to deadlines. While Chinese companies may have a general comparative advantage over their competitors, this is not always the case. Many Western companies do maintain a slight competitive edge over the Chinese when it comes to specialized or technical areas of construction, in finishing and reliability as well as quality and timeliness, which enables them to secure work and access finance, especially from local sources. But it would appear that

16 Page 16 the gap is closing. A senior manager with a foreign contractor in Tanzania is resigned to the fact that companies such as his will eventually be squeezed out and only be able to engage in subcontract work for Chinese firms. He had subcontracted for the Chinese before and cited a number of other foreign based companies that had also worked for Ch inese companies. His overall impression of the Chinese companies was very positive, a sentiment echoed by several prominent Tanzanian companies. Two senior executives with a large Kenyan-based contractor operating in Tanzania remained very optimistic that their company will find a niche area as the construction market becomes more competitive. They pointed out that donors such as the EU will not fund Chinese companies directly and went on to explain that other sources of funds such as the World Bank are obliged to engage contractors from a range of countries and cannot therefore use Chinese companies for every contract no matter how competitive they might be. China on China Competition Competition between Chinese companies is fierce and the diversity of Chinese construction companies operating in Africa is enormous, ranging from multi-billion dollar SOEs from mainland China to small single-person operations established by Chinese nationals living incountry. The majority of Chinese companies in the initial phase of market entry were SOEs. However, the number of private Chinese construction companies is growing rapidly. While SOEs receive greater assistance from the Chinese government in terms of access to African governments and information on the market tenders, the private construction companies are clearly more efficient in project implementation. The geographic origin of a company in China also has a bearing on the company s competitiveness. The bigger Chinese companies originating along China s more developed eastern seaboard have access to extremely advanced technology and equipment while others, especially the smaller companies from China s less advanced interior regions, continue to employ rudimentary techniques. Chinese companies based along the coastal areas and southern parts of China also have a distinct advantage over northern Chinese companies as result of their proximity to Hong Kong s dynamic economy, the advanced infrastructure in this region of China, and the speed with which they may mobilize their procurement strategies. In situations where competition among Chinese companies is sparse, such as in Sierra Leone, Chinese communities appear very close-knit. They regularly share information and equipment. Such cooperation was less common in the more developed markets of Zambia

17 Page 17 and Tanzania where there was some degree of cooperation in the private sector but little to none in the more lucrative areas of civil construction. Where Chinese construction companies are properly established, the only se rious competition they face is from one another. Such competition serves to streamline operations, reduce costs and improve quality. Yet the incredibly small profit margins are obviously unsustainable, thereby exposing them to a range of risks including currency fluctuations and rising energy, transport, and commodity prices. It was suggested by a senior executive at one Chinese company that low profits were maintained in order to increase market share at the expense of local, international and other Chinese companies, with the hope that less viable companies will be weeded out and only the most effective companies will remain. The demand for construction and infrastructural refurbishment will continue to increase following the unprecedented economic growth in many African countries resulting from China s increased demand for oil and other commodities. Chinese companies will be well positioned to take advantage of this, especially in the absence of any viable competition and the strong support of African governments such as Angola India India s investment in Africa s infrastructure is reflective of competing trends with Chinese firms in the continent. They are entering the same sectors, mostly in the automotive, construction and extractive industries. Unlike the Chinese, the majority of the Indian firms are private and utilize existing (ethnic) networks in East and Southern Africa to facilitate their market entries. But whereas Chinese SOEs have little difficulty accessing capital from China s policy banks, Indian firms cost of capital is market rather than politically determined. On the other hand, however, The Indian government has utilized its relationship with the NEPAD programme to entrench its presence more concretely in the African market. Something that the Chinese have only recently begun to consider. India has provided a US$200 million credit line for projects under NEPAD. Projects worth US$80 million have already received funding in the DRC, Mali, Niger and Senegal. Some of these projects are aligned to NEPAD s ICT goals. It would seem that both China s and India s involvement in Africa s infrastructure sector is a symbiotic relationship to its growing energy needs. For example in Nigeria India's state-run Oil & Natural Gas is already investing $6-billion to build a power plant and railroads in return for stakes in oil fields. Although energy features prominently in their investment trajectory

18 Page 18 (like the Chinese), Indian firms are taking advantage of opportunities opening up in Africa s nascent telecommu nication sector as well. This has been demonstrated by the US$1 billion investment by the Indian government in a joint initiative with the African Union to build a Pan- African e-network (PAN), which will connect the continent s 53 states with integrated satellite, fibre, and wireless technology. In this regard the state-owned Telecommunications Consultants India Ltd. (TCIL) has been selected to implement the network, which India will manage for a period of fives before transferring it to the African Union. This is just another example of the competition between the two rising powers in Africa s telecom industry. Indian investors have also been quick to seize opportunities emerging in Africa s hotel and leisure industry. Recently it has been reported that Indian firms are considering investing in South Africa s infrastructure sector as part of the needs for the 2010 Soccer World Cup. While it does seem that India and China are competing for market space in Africa, the Indian companies have been more conscious of and affected by the image of good governance. This is probably due to the fact that Indian firms are guided by a robust civil society at home and the image of India being the largest democracy. Yet, issues of corruption and graft also plaque the practices of Indian firms, especially in parts of East Africa. Moreover, it is equally unclear to gauge the practices of Indian firms entering Africa s infrastructural market and whether they replicate and overlap with some of the strategies adopted by their Chinese counterparts. Thus understanding the engagement of Indian firms in Africa s infrastructure sectors would form a critical component of this study and provide a valuable framework to assess not only the competition it faces from Chinese firms but also what impact it has for the non ADs in the region. 5. Issues, Challenges and Scope 5.1. Issues and Challenges China s State-Owned Enterprises (SOEs) in the extractive industries are often recipients of large amounts of low cost capital provided by the SOEs and commercial banks. The Government of India has also adopted a pragmatic approach to supporting its new emerging industries, quite unlike its role in more traditional sectors such as mining and infrastructure development.

19 Page 19 Competition between Indian and Chinese companies, amongst Chinese firms themselves and with traditional corporates in Africa is likely to escalate in the coming years. The fact both Beijing and New Delhi are using solid political foundations upon which to build their commercial engagement strategies, makes their entry into Sub-Saharan Africa s market all the more interesting. As th is trend becomes more embedded, both Indian and Chinese interests will increasingly displace the presence of traditional European and South African construction firms across the continent. This is already beginning to emerge in Angola, and Botswana, while in Tanzania and Zambia it is estimated that Chinese construction firms control approximately a third of the sector. This will undoubtedly shift the business landscape in the continent away from Europe towards the East where African economies will become more calibrated towards Asian markets. African governments are just beginning to appreciate the strength of their position in the new scramble. Even though China and India have significantly altered and increased Sub- Saharan Africa s leverage vis-à-vis the West, there are several cross cutting issues which require further investigation. This will help to develop a more nuanced understanding and framework of how Chinese and Indian investments in Sub-Saharan Africa s infrastructural sector takes places, what facilitates the market entry of their corporates, how this process is managed and the long -term implications it has in redressing the region s development challenges. Local Labour and Procurement While numerous examples exist in sub-saharan countries of Chinese and Indian companies subcontracting local companies, there is a general dissatisfaction with the quality of work undertaken by local contractors. Doubts about their ability to manage finances and deadlines, lack of skills amongst local workers and high worker turnover are cited as principal reasons for a lack of local recruitment where this may exist. For example in the construction sector study conducted by the Centre for Chinese Studies, it was shown that Chinese construction companies preferred bringing in their own labour to address inefficiencies in the market. In some instances this accounted for per cent of the total workforce on Chinese construction projects. The reasons cited for this importation of labour was that Chinese workers had a higher productivity than local workers. Three reasons were cited for this higher productivity. These are: The Shift Strategy employed by some Chinese companies ensures that workers can be on site around the clock. In some compounds, there is one bed, two

20 Page 20 workers policy whereby a night shift worker and a day-shift worker share the same bed, ensuring 24 hour productivity. The rates of absenteeism of Chinese construction workers are very low. The majority of contractors using local labour reported that absenteeism to rarely be less than 20 percent. This effectively increases labour costs by one fifth. It emerged from the study by both Chinese companies and foreign contractors that the rates of absenteeism on projects were virtually nil. Chinese workers are well trained and considered skilled. The skills level of Chinese workers is recognized across the industry. They usually undergo an intensive training programme, prior to expatriation. In addition, Chinese workers are multi-skilled and will be involved in each section of construction. Whereas it is normal practice to employ tiered hierarchies of workers, it has been found that Chinese artisans can also double up as site diggers and participate in manual labour as well as the more skilled undertakings of an artisan. Thus one Chinese worker will dig the foundations, lay the cables and orchestrate the electrics of a construction site. Such a modus operandi drastically reduces the number of workers required on a site. The dynamic surrounding Chinese labour practices in Africa must be understood in relation and the linkages it has to the employment situation in the domestic China market. Salaries for unskilled labourers in China vary enormously, but generally range between US$1-3 a day depending on location, ownership of the company and the legal status of the workers. There are over 100 million migrant workers from rural areas in Chinese cities without work permits supplying approximately 80 percent of China s construction labour. The conditions are usually poor and underpaid by global labour standards. Therefore the attractiveness to work on overseas projects outweighs any benefits to be accrued at, especially when Chinese workers can expect a salary increase in the order of 30 and 400 percent as an incentive to work overseas. While working overseas enables some workers to acquire management or supervision skills, several respondents interviewed revealed that working overseas enables them to look for opportunities to establish their own businesses as traders or restaurants. On the other hand some more skilled managers felt that working in African operations was not supportive of their career development plans because in Africa they were not exposed to the cutting edge technology that are generally used to in China. In addition, Chinese companies rely more heavily on certificates and professional papers to evaluate the capability of potential employees. Few construction workers in Africa possess